2021 Tax Updates

The year 2021 saw quite a few significant tax updates expected to prove quite beneficial to taxpayers. Among the changes that were implemented were increases to tax brackets and the standard deduction, in addition to extensions and expansions to some 2020 tax provisions, such as the expanded child tax credit.

If you have yet to file your 2021 taxes, you will want to read this useful overview of important tax updates for last year. These key tax rule modifications are bound to affect your financial picture in 2022.

NEW Tax Return Boosting Tax Updates For 2021

Higher Deductions for Medical Expenses

In what could prove to benefit your pocketbook, unreimbursed medical expenses exceeding a certain percentage of your income are now tax deductible.

That percentage, which is known as the “floor,” has fluctuated between 7.5 percent and

10 percent of your adjusted gross income (AGI) for the past several years. However, for the 2021 tax year, it is down again to 7.5 percent of your AGI.

So, if your AGI is $100,000, you are able to deduct unreimbursed medical expenses in excess of $7,500.

For you to qualify, you must itemize your deductions. 

Higher Standard Deductions

In paying your taxes, you can take the standard deduction to reduce your tax bill or you can immerse yourself into the numbers and itemize your deductions.

For the 2021 tax year, the standard deduction is increasing to the following: 

• Ø$12,550 for single filers and married couples filing separately, up $150 from 2020.
•  $18,800 for heads of households, up $150 from 2020.
•  $25,100 for married couples filing jointly, up $300 from 2020.

If you are age 65 or older, you can add an extra $1,350 per person if you are married and filing jointly, or an extra $1,700 for household heads and single filers.

It is worth noting that if you take the standard deduction, you won’t be able to take advantage of certain individual deductions, such as the aforementioned unreimbursed medical expenses.  Since the standard deduction almost doubled in 2017, it is still the best option for many taxpayers. 

Charitable Donation Deduction Increased 

For your 2020 tax return, a temporary provision of the CARES Act permits as much as a $300 deduction per tax return for charitable giving, even if you don’t itemize your taxes. Looking at tax updates, with the 2021 tax return, this benefit has expanded up to $300 per person.  So, if you are married and filing jointly, you might qualify for up to a $600 deduction for charitable donations. 

Boosted Child Tax Credit 

Taxpayers who qualified in 2020 could claim a $2,000 credit per child 16 years or under. Those credits were partially refundable, in other words, the government issued refund checks of up to $1,400 per child for low-income filers with at least $2,500 of earned income. 

The credit became more rewarding for the 2021 tax year. 

The U.S. government increased the credit to a maximum of $3,000 per child 17 and under, and $3,600 for children five and under. These credits are completely reimbursable, with no $2,500 earned income requirement. That increase should be good news to you if you have a low tax obligation. 

You should know some eligibility rules have changed. In order to receive the maximum credit, your AGI has to be under: 

• $75,000 for single filers

• $112,500 for head-of-household filers

• $150,000 for married couples filing jointly

If your earnings do pass those limits, the credit begins to phase out. 

The U.S. government has been making advance payments on half of the credit, beginning July 15 and ending Dec. 15. You are able to claim the other half on your 2021 tax return. 

So, if you do not receive advance payments you qualify for, you can address it at tax time. 

Tax Updates for Income Brackets 

Among other tax updates, income brackets changed slightly. Although the tax rates were not changed for 2021, the income brackets expanded to allow for inflation. 

Keep in mind that while soaring prices have sparked the concern of economists – inflation reached a 31-year high in October 2021 – the brackets and standard deduction for 2021 were locked in back in 2020. 

The 2021 tax brackets are: 

37 percent for incomes over $523,600; $628,300 for married couples filing jointly; 

35 percent for incomes more than $209,425; $418,850 for married couples filing jointly; 

32 percent for incomes over $164,925; $329,850 for married couples filing jointly; 

24 percent for incomes greater than $86,375; $172,750 for married couples filing jointly; 

22 percent for incomes over $40,525; $81,050 for married couples filing jointly; 

12 percent for incomes more than $9,950; $19,900 for married couples filing jointly; 

10 percent for incomes of $9,950 or less; $19,900 for married couples filing jointly;

Return of Required Minimum Distributions 

When you turn age 72, the IRS stipulates that you must begin to withdraw money yearly from tax-advantaged retirement accounts, and including traditional IRAs and 401(k)s. 

These required minimum distributions, or RMDs, count fully taxable income. The withdrawals help to ensure taxpayers don’t use retirement accounts to avoid taxes. 

The Coronavirus Aid, Relief and Economic Security (CARES) Act halted these forced withdrawals for 2020, however, RMDs have returned for 2021. 

Seniors who are age 72 by the end of 2021 have to take their RMDs from their tax-advantaged retirement accounts – excluding Roth IRAs – by Dec. 31, 2021. This requirement also applies to taxpayers who inherited an IRA. 

What’s more, if you turned 72 in 2021, you do have until April 1, 2022 to take your first distribution. 

Be warned, if you do not withdraw a sufficient amount on time, the government will impose a 50 percent excise tax on the money you were supposed to take. 

No Taxes Owed on Forgiven Student Loans 

If you were fortunate enough to have all or a portion of your student loans forgiven in 2021, you do not have to be subject to taxation on the forgiven amount. Before the American Rescue Plan, which became law in March 2021, forgiven student loan balances were added to your income for the year and taxed accordingly. 

However, a new stipulation prevents forgiven post-secondary education loans from being taxed through 2025. Although this law has not been extended beyond 2025, there is a chance it will be. 

There is more good news. If your employer assisted you in paying down your student debt faster, you are able to exclude as much as $5,250 of that money.  This exclusion is an additional temporary benefit beginning in the 2020 tax year, and it has been extended through 2025. 

Health Flexible Spending Contributions Increased 

If you have a health flexible spending account, or FSA, you are in for some good news. The limit for tax-free contributions has been increased to $2,850, up $100 from last year. 

Earned Income Tax Credit Increased 

This government program is intended to benefit people in lower income brackets. This tax credit can decrease your taxable income and wages. The American Rescue Plan expanded and increased this credit for the 2021 tax year. 

Receive a $300 Charitable Deduction, Even If You Don’t Itemize 

The U.S. government is inviting Americans to be charitable as the pandemic continues. In past years, you were only able to deduct charitable donations if you itemize your deductions. However, in 2020, the rules were modified to permit a $300 charitable contribution deduction per tax return in addition to the standard deduction. 

For the 2021 tax year, tax updates include an expansion of this benefit. Now, instead of a $300 deduction per return, it is $300 per person.  That means if you file jointly with the standard deduction, you are able to deduct as much as $600 for charitable contributions. 

Keep in mind there are indeed benefits to itemizing charitable contributions. 

Prior to 2020, you were able to deduct charitable contributions up to 60 percent of your adjusted gross income (AGI). The CARES Act increases this limit, permitting you to deduct up to 100 percent of your AGI, and this temporary change was extended through 2021. 

Look to Drilldown Solution for Expert Tax Planning Services for Your Small Business 

Drilldown Solution delivers a seamless tax planning and compliance process.  As is the case with all of our programs, tax planning solutions are custom-made based on an individual’s needs, wants, and the goals of your business.  You can expect your business to greatly benefit from our dedicated team of tax experts, ensuring your tax planning needs are met quickly and efficiently.  

At the core of our tax planning services is the promise to you that we will devise a tax strategy aimed at reducing your liabilities and optimizing profits for your business. 

Our Provo, Utah Tax Planning Services are just what your small business needs. 

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Our accounting services are designed to reduce your administrative and bookkeeping burdens and provide you with valuable financial benchmarks for your business. This results in keeping you updated and informed. 

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Our goal at Drilldown Solution is to put your small business in the best financial position possible, following tax updates, and utilizing proactive processes and personal care!